Chip Flory: How to Manage Market Stress

As Farm Journal Economist and host of the “AgriTalk” radio program, Chip Flory helps farmers understand the markets and seize opportunities.

( Lindsey Benne )

Marketing decisions are stressful. There’s just too much riding on the decision for it to be stress free. The stress you feel, however, can be managed. It just takes some prep work and daily attention.

Be Prepared

Do your basis analysis. Is basis at your cash-market hubs normal, strong or weak? Knowing if you will be locking in, or leaving open, basis when you make the next sale will predetermine your marketing strategy. Knowing if you will hedge or write a cash forward contract in advance of a marketing decision makes the choice easier.

Most importantly, know how many dollars you’re most likely to spend per acre to grow your crop. Yield expectations will vary throughout the growing season, but start with your actual production history to calculate your cost of production and determine potential revenue.

You’re daily decision-making should start with an evaluation of how potential revenue stacks up against costs. A positive return obviously cuts stress levels, but even when returns are negative, knowledge is power. Most years offer at least brief opportunities to secure profits. Knowing your costs allows you to make a quick decision.

Document Decisions

Every day, decide if you should sell a portion of production and write down what you decided. Document basis (strong, weak or normal), your attitude toward price (bullish or bearish) and how potential revenue stacks up against estimated costs. One sentence to explain why you did nothing will answer the question “what was I thinking” months down the road. When a decision is made to make a sale, document the action. Include how the decision changes your risk exposure moving forward and goals to manage that risk.

A daily entry in a marketing journal will give you confidence you are doing what you must to actively manage risk. That alone will help manage stress levels, making it easier to make decisions.

Remove Risk, Maintain Potential

It’s tough to make a sale during a spring rally such as this past May and June. Selling a crop you couldn’t get planted didn’t make sense.

However, you can remove downside risk while maintaining upside price potential. This strategy starts with a cash sale and is completed, most often, with a long call option. It sets a minimum price: Cash price minus the premium paid for the call option.
If prices fall, you were smart to make the cash sale.

If prices rally, you were smart to buy the call option.

Either way, you’re prepared for the next move in the market. Sounds pretty close to stress-free marketing to me.

All episodes of “AgriTalk,” as well as other Farm Journal broadcasts, are available on demand via the “AgriTalk” app. Download the app for free on Apple and Android devices. Learn more at www.AgriTalk.com